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2020 Financial Markets Update

Week in Review: June 17, 2022

June 21, 2022

Recap & Commentary

Markets ended the week lower faced with intensifying recession concerns and the Federal Reserve’s single largest rate hike since 1994. For the S&P 500, which officially entered bear market territory, it was the worst week since March 2020.

Following the release of disappointing Consumer Price Index (CPI) data the prior week, which showed price increases reaccelerated in May, it was widely expected that the Fed would increase rates by 0.75%. On Wednesday, the Fed confirmed predictions, demonstrating its commitment to “returning inflation to its 2% objective.”  Of course, the Fed has little control over most of the supply-side factors currently driving prices higher. What the Fed can control, however, is demand. By raising rates, the Fed is hoping to reduce demand enough to correct current supply demand  imbalances, without triggering a recession, something that Fed Chair Jay Powell has admitted will be “challenging.” Incoming inflation data will be key to how forcefully the Fed continues to act, with Powell indicating that the Fed could hike by another 0.75% at its next meeting if necessary.

As part of the meeting, the Fed updated its famed “Dot Plot” showing the rate expectations of Federal Open Market Committee (FOMC) members.  Compared to the March Dot Plot, the Fed now expects the Fed Funds rate to end 2022 at 3.4%, up from the prior estimate of 1.9%. In addition, the Fed now expects full year Gross Domestic Product (GDP) growth of 1.7%, down from 2.8%, and for core Personal Consumption Expenditures (PCE), the Fed’s preferred measure of inflation, to end the year at 4.3%, up from the prior estimate of 4.1%.

Economic Commentary

Producer Price Index (PPI) inflation accelerated from April to May, but moderated slightly compared to a year ago. On a headline basis, PPI rose 0.8% in May, compared to 0.4% in April. Compared to a year ago, PPI slowed from 10.9% in April, to 10.8% in May. Producer prices will most likely need to slow before consumer prices can slow. A caveat, however, is that CPI could slow before PPI, if companies reach a point where they can no longer pass along price increases to consumers. This would come at the cost of margins, leading to reduced earnings, which would likely impact investor sentiment.

Retail sales unexpectedly fell in May, marking the first monthly decline in five months. Higher prices were cited as the primary culprit, as consumers reduced spending in the face rising inflation. Reflecting record-high gas prices, spending at gas stations rose 4% from April, and 43% compared to a year ago.  Excluding autos and gas, retail sales rose just 0.1%, compared to 0.8% in April. Services spending was a bright spot, with spending increasing 17.5% from last year.

Housing starts fell to a 13-month low in May, as higher mortgage rates reduced demand. According to Freddie Mac, the national average for a 30-year mortgage reached 5.78%, the highest level since 2008. In December, the national average stood at just 3.11%. On a $1M home, financed with a 30-year fixed mortgage, and a 20% down payment, that equates to an additional $1,260 per month.

Of Note

After peaking at over $3T in November 2021, the total market value of cryptocurrencies fell below $1T, highlighted by Bitcoin which fell as low as $17,700, its lowest level since 2020 and down 74% from record high of $67,580.

S&P 500-5.8%
Small Caps-7.5%
Intl. Developed-5.8%
Intl. Emerging-4.7%
U.S. Bond Market-0.9%
10-Year Treas. Yield3.24%
U.S. Dollar0.5%
WTI Oil ($/bl)$110
Gold ($/oz)$1,842

The Week Ahead

  • Existing Home Sales
  • New Home Sales
  • Consumer Sentiment
  • Markit PMI
  • Weekly Jobless Claims

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